China’s International Investment Position and the Role of Valuation Channel in External Imbalance Adjustments
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| Title | China’s International Investment Position and the Role of Valuation Channel in External Imbalance Adjustments
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| Author | Xiao Lisheng and Chen Sichong |
| Organization | Chinese Academy of Social Sciences，CASS |
| Email | xiaols@cass.org.cn；cscwin@gmail.com |
| Key Words | International Investment Position; External Imbalance; Valuation Channel; Trade Channel |
| Abstract | This paper provides quarterly estimates of China’s International Investment Position at market value over the period of 1998-2011. Using this novel data set, we follow Gourinchas and Rey（2007b）to explore the implications of a country’s inter-temporal budget constraint, in order to examine quantitatively how much the variation in China’s current external imbalance comes from future net export growth (trade channel), and future changes in returns of the net foreign asset portfolio (valuation channel), respectively. Our results are twofold: first, we find that the trade channel can account for about 92 percent of the cyclical external imbalance in China, while the remaining 8 percent of external imbalance adjustment can be attributed to the valuation channel. Second, we find a significantly positive correlation between these two adjustment mechanisms, suggesting that the trade and valuation channels are mutually reinforcing. Therefore, positive current external imbalances imply that China must not only experience future decreases in net export growth, but also suffer from negative abnormal returns on net foreign assets. |
| Serial Number | WP441 |
| Time | 2013-04-26 |
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